Sony Memory Stick Walkman1 November 14, 1999 was the second day of COMDEX Fall, which was being held in Las Vegas, Nevada. It was the last COMDEX show before the millennium. Every participating company in this year’s show demonstrated its own vision and capabilities for coming millennium. Nobuyuki Idei, the CEO of Sony Corporation, and Howard Stringer, Chairman and CEO of Sony Corporation of America, delivered Sony's vision on power of hardware in a networked society. During the speech, Nobuyuki demonstrated the recording capabilities of the new Memory Stick™ and its digital Walkman. He announced that Sony Memory Stick Walkman will be launched in the US in January, 2000 starting with its 64MB Memory Stick™ at a suggested retail price of $399. For him, this announcement was more meaningful because the year 1999 was also the 20th anniversary of Sony Walkman®, the portable personal cassette player which changed forever the way people listen to the music. Behind the excitement and expectation of new product announcement, he was still deeply concerned about the success of the Walkman in the next millennium. Sony expects a decrease in sales of audio equipment for the fiscal years 1999 and 2000. Also, the digital Mini Disc Walkman, which was Sony’s previous attempt to revolutionize the way people listen to music, had not been successful in the market in spite of persistent marketing efforts. Sony Corporation Sony Corporation was established on May 7, 1946 as Tokyo Tsushin Kogyo (Tokyo Telecommunications Engineering Corporation) but later changed its name to Sony in 1958. The _______________________________________________________________________________________________________ University of Michigan Business School Students Umpai Hrimthepatip, Nisanat Kulkollakarn, Sang Yong Lee, and Mani Sethi prepared this case under the supervision of Professor Allan Afuah as the basis for class discussion rather than to illustrate either effective or ineffective handling of a business situation. Sony Memory Stick Walkman firm started with about 20 dedicated engineers, including the founder, Mr. Masura Ibuka. Ibuka’s original motive for setting up the firm was to create a stable work environment where engineers with a deep and profound appreciation for technology could realize their societal mission and work to their heart's content. Its first business was to develop and produce communication equipment. Later, it expanded into other areas such as electronic products, and audio equipment. In 1999, Sony Corporation had 3 business groups: Electronics, Entertainment, and Insurance & Finance. Sony Group’s organizational chart is shown in Exhibit A. From a total of $57 billion in revenues, electronics contributed 64%. Game console and software business accounted for 11%, music business 11%, motion picture and television business 8%, insurance business 5%, and others 1%. Sony employed about 177,000 employees worldwide in 1999; not counting those employed through its 1,041 subsidiaries and 65 affiliates all over the world. Exhibit B presents a summary of corporate data. Exhibit C shows Sony’s financial statements for the fiscal years 1996-1999 and forecasted financial statements for the fiscal years 2000-2004 respectively. Sony Electronics and Audio Businesses Sony has been known as a leading manufacturer of audio, video, communications and information technology products for the consumer and professional markets. Since its foundation, Sony has developed many innovative products and is now one of the world’s foremost companies in the consumer and industrial electronics and entertainment business areas. Exhibit D summarizes Sony’s electronics product innovations. Its electronics products are categorized into five groups: Audio, Video, Televisions, Information and Communications, and Electronics components and others. See Exhibit E and F for details on sales and income for each group. Since the fiscal year 1980, Sony’s electronics business has posted an average of 11% annual growth, mostly led by major technology-driven changes in the electronics industry2. Audio equipment accounted for about 15% of Sony’s total revenues and about 25% of its electronics business revenues. Annualized growth for audio equipment has been 10% over the past 20 years. Exhibit G shows Sony’s revenues for audio sales for the last 20 years. Although Sony has recorded substantial growth in electronics business in the past, it posted decreased revenues and operating profits in FY 1999 and expects its revenues and operating profits to continue to fall in FY 20003. The large decline in revenues primarily came from audio equipment, color TVs as well as electronics devices and others. Strong yen, price declines, and reduced competitiveness have impacted these businesses. 4 Sony Walkman Products Sony introduced the first Walkman, ‘TPS-L2’, on July 1st, 1979. Before that, music could only be enjoyed through a stereo system at home or in a car. Masaru Ibuka and Akio Morita, Sony founders, created the concept of Walkman portable stereo as a means of personal music entertainment. Walkman became extremely popular particularly with young users. _____________________________________________________________________________________________ 2 Sony Memory Stick Walkman The first Walkman model was introduced with the lightweight headphones and as a compact cassette tape player. With the emergence of new music media, the Walkman has expanded its product lineup. It includes the Sony Discman portable CD player ‘D-50’ in 1984, DAT (Digital Audio Tape) Walkman ‘TCD-D3’ in 1990, and MiniDisc Walkman ‘MZ-1’, ‘MZ-2P’ in 1992. Exhibit H presents the details of Sony Walkman Timeline. The audio CD format, developed in 1982 by Sony and Philips, was the first mass-market digital audio format. Because of its superior sound quality and greater convenience, the audio CD has virtually replaced analog music. Continuing the development of the compact disc, Sony introduced the Enhanced CD, CD Extra, which combines the music CD with the CD-ROM. CD Extra discs contain music that can be played on a standard CD player and data that can be read by a suitably equipped CD-ROM drive connected to a personal computer. The latest development is “Super CD” that offers better sound quality than any other CD formats. Sony recently launched its first Super Audio CD players (SACD) in the U.S. in order to expand the high-end audio market. Minidisc (MD) is a digital audio format designed by Sony to replace the audio compact cassette. Due to digital compression technology, Minidisc can store up to 74 minutes of near CD-quality sound on a 64mm disc. Minidisc uses the ATRAC coding method to produce efficient sound. Sony’s Minidisc and Minidisc players have not completely caught on with other music and electronics companies. As a result, the MD system currently has a small customer base in the audio market and generates much lower revenues for Sony than the CD Walkman. Sales breakdown of the Walkman is shown in Exhibit I. For the past 20 years, the Walkman has created a new global culture of “enjoying music any where and any time” and has changed the way people listen to music. According to Sony’s FY 1998 figures, cumulative worldwide shipments of the cassette tape Walkman are 186 million units, 46 million units for the CD Walkman, and 4.6 million units for MD Walkman. Distribution Sony audio and video products are distributed through power retailers, mass merchandisers, factory outlets, and online direct. Power retailers: These include Best Buy, Circuit City, Radio Shack, etc. Since they have nationwide distribution channels and buy products in bulk, they enjoy great buying power. They are dedicated to electronic goods and value-added resellers. They have educated sales people. Most new products are introduced through these retailers. Mass merchandisers: These include Wal-Mart, K-mart, Sears, etc. Like power retailers, they have nationwide distribution channels but they are not dedicated to electronic goods. They tend to sell mostly commodity electronic goods, such as Walkman, small and mid size color TV, VCR, etc. Not many premium products are sold through these channels. Factory outlets: These are stores that are owned and operated by Sony. Factory outlets only sell products that have been returned to Sony. These products are inspected and if necessary _____________________________________________________________________________________________ 3 Sony Memory Stick Walkman reconditioned to meet original product specifications. They may have minor cosmetic blemishes but are backed by Sony’s warranty. There are only 12 outlets currently running in the US. On-line direct: Sony has a web site that sells virtually all Sony products. It can also direct consumer to the nearest location where they can buy Sony products. The Music Industry Revolution Major recording labels -- Sony Music Entertainment, Warner Music Group, BMG Entertainment, EMI Recorded Music and the Universal Music Group -- control most of the popular music in the U.S. The traditional music industry value chain consists of four main steps. First, talent search involves visiting various bars and clubs where various bands play and listening to demo tapes sent by artists. Second, production of album involves funding the recording of songs by the band. The recording labels do not typically own recording studios. Third, promotion of bands, albums, and songs involves developing and maintaining relationships with various radio and television stations. Last, distribution of music involves mass production of CDs and tapes and manages of retail channels. Since the advent of Internet, it has been a force of change in the music industry5. While all businesses compete on the Internet as a trading outlet, the additional complication for the music industry is that the Internet itself has become a source of music. The forces driving this change are: (1) Various audio compression formats allow conversion of large music files into small music files. (2) Various security mechanisms prevent piracy of these files and provide copyright protection. (3) Internet allows these small files to be posted and downloaded quickly using a standard 56K modem. (4) Free software that plays these files on PCs.